In the past several years, the national debt of the United States has undergone a tremendous change. Long-term securities -- those with maturities of seven years or more -- have gone from about 30 percent of the debt in 2009 to about 40 percent today. By 2018, according to the Treasury's own estimates, they'll make up 50 percent of the debt, a proportion the Treasury expects to maintain from then onward. The United States is doing what any smart borrower would do: locking in low rates for the long term. As a result, its probability of default for any given level of debt has dropped.
The nature of government spending is undergoing a dramatic shift as well. For a decade, the United States spent roughly $100 billion a year on wars whose value to creditors -- in terms of enhancing the nation's ability to repay its debts -- was not exactly clear. Reducing spending in this area will make the United States more credit-worthy. But even if this spending were simply replaced by programs that invest in the economy -- infrastructure, scientific research, education, health care -- it would still make the United States a less risky borrower.
In fact, there is a powerful argument that the United States can and should borrow more to spend money on these long-term investments. Yet the mere idea of spending more, increasing deficits, and adding to the national debt makes politicians, pundits, and especially credit-raters of all stripes recoil in horror. They do not seem to understand that the United States, despite its national debt growing to about 75 percent of GDP, may actually be a better risk now than it was in, say, the early 1990s.
The markets seem to understand this. Interest rates on Treasury securities have fallen steadily. Of course, the Federal Reserve has been doing its best to keep rates low, and other countries have been in even worse shape fiscally than the United States. But had those been the only important factors, rates on longer-term securities -- 10-year and 30-year debt, for example -- would have recovered more by now.
In the next couple of decades, the United States will indeed have to reduce its budget deficits. Medicare costs and historically low tax rates are likely to be an unsustainable combination. But in the meantime, the nation can do much to improve its credit-worthiness through changes in the composition of its borrowing and spending. Indeed, it already has.
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